Ian Bremmer, NYU professor and head of the geopolitical consulting powerhouse Eurasia Group, consults at the highest levels with both governments and companies because he brings to the table robust geopolitical analysis and a compelling thesis: that we are witnessing “the creative destruction of the old geopolitical order.” We live, as his last book told us, in a “G-0” world. In today’s Outside the Box, Ian spells out what that creative destruction means in terms of events on the ground today.

As Ian notes, the most prominent feature of the international landscape this year has been the expansion of geopolitical conflict. That expansion is gaining momentum, he says, creating larger-scale crises and sharpening market volatility.

Hold on to the reins now as Ian take us for a ride with the “Four Horsemen of the Geopolitical Apocalypse.” (For more information about the Eurasia Group or to contact Ian Bremmer, please email Kim Tran at tran@eurasiagroup.net.)

We’ll follow up Ian’s piece with an excellent short analysis of the Iraq situation from a Middle East expert at a large hedge fund I correspond with. Pretty straightforward take on the situation with regard to ISIS. This quagmire has real implications for the world oil supply. (It appears that the Sunni rebel forces are now in complete control of the key Baiji Refinery, which produces a third of Iraq’s output.)

Back in Dallas, it’s a little hard to focus on geopolitical events when seemingly all the news is about ongoing domestic crises. But the outrageous IRS loss of emails doesn’t really affect our portfolios all that much. What happens in Iraq or with China does. There’s just not the emotional impact.

One domestic humanitarian crisis that is brewing just south of me is the massive influx of very young children across the US-Mexican border. When this was first brought to my attention a few weeks ago, I must admit that I questioned the credibility of the source. We have had young children walking across the Texas border for decades but always in rather small numbers. The first source I read said that 40,000 had already come over this year. I just found that to be non-credible, but then with a little reasonable research it not only became believable but could be a bit low – it looks as many as 90,000 children will cross the border this year.

What in the name of the Wide Wide World of Sports is going on? First of all, how do you cover up something of this magnitude until it is a true crisis? When the administration and other authorities clearly knew about it last year? (The evidence is irrefutable. They knew.)

I am the father of five adopted children. In an earlier phase of my life, I was somewhat involved with Child Protective Services here in Texas. It was an emotionally difficult and heartrending experience. (One of my children came out of that system and three from outside of the United States). I have no idea how you care for 90,000 children who don’t speak the language and have no connection to their new locale. Forget the dollar cost, which could run into the tens of billions over time. These are children, and they are on our doorstep and our watch. You simply can’t ignore them and say, “They are not supposed to be here, so it’s not our responsibility.” They are children. Someone, and that means here in the US, is going to have to figure out how to take care of them, even if it is only to learn why they try to come and figure out where to send them back to. And frankly, trying to to send them back is going to be a logistical and legal nightmare, not to mention psychologically traumatic to the children.

Maybe someone thought that waiting until there was a crisis to let this information slip out (and we found out about it because of photos posted anonymously of children packed together in holding cells) would create momentum for immigration reform. And they may be right. But I’m not certain it’s going to result in the type of immigration reform they were hoping to get.

I have to admit that I’ve been rather tolerant of illegal immigrants over the course of my life. There are a dozen or so key issues that I think this country should focus on, but I’ve just never gotten that worked up about illegal immigration. The simple fact is that everyone here in the US is either an immigrant or descended from immigrants. It may be, too, that I’ve hired a few undocumented workers here and there in my life. As an economist, I know that we should be trying to figure out how to get more capable immigrants here, not less. What you want are educated young people who are motivated to create and work, not children as young as four or five years old who are going to need housing, education, adult supervision, healthcare, and most of all a loving environment where they can grow up.

It is one thing for undocumented workers to come across the border looking for jobs or for families to come across together. It is a completely different matter when tens of thousands of preteen children come across the border without parents or supervision. They didn’t get across 1500 miles of desert without significant support and a great deal of planning. This couldn’t be happening without the awareness of authorities in Mexico and the Central American countries from which these children come, and if this is truly a surprise to Homeland Security, then there is a significant failure somewhere in the system.

And if it was not a surprise? That begs a whole different series of questions.

This is a major humanitarian crisis, and it is not in the Middle East or Africa. It is on our border, and we need to figure out what to do about it NOW!

I don’t care whether you think we need to build a 20-foot-high wall across the southern border of the United States or give amnesty to anyone who wants to come in (or both), something has to be done with these children. It is a staggering problem of enormous logistical proportions, and we have a simple human responsibility to take care of those who cannot take care of themselves.

And on that note I will go ahead and hit the send button, and let’s focus on the critical geopolitical events happening around the globe. Iraq is a disaster. Ukraine is a crisis. What’s happening in the China Sea is troubling. It just seems to come at you from everywhere. Even on a beautiful summer day.

Your stunned by the magnitude of it all at analyst,

John Mauldin, Editor
Outside the Boxsubscribers@mauldineconomics.com

(From Ian Bremmer)

dear john,

we’re halfway through 2014, and the single most notable feature of the international landscape has been the expansion of geopolitical conflict. why should we care? what’s the impact; what does it mean for the global economy? how should we think about geopolitics?

my thoughts on the topic, looking at the four key geopolitical pieces “in play”–in eurasia, the middle east, asia, and the transatlantic.

geopolitics

i’ve written for several years about the root causes of the geopolitical instability the world is presently experiencing. a new, g-zero world where the united states is less interested in providing global leadership and nobody else is willing or able to step into that role. that primary leadership vacuum is set against a context of competing foreign policy priorities from increasingly powerful emerging markets (with very different political and economic systems) and a germany-led europe; challenges to the international system from a revisionist russia in decline; and difficulties in coordination from a proliferation of relevant state and non-state actors even when interests are aligned. all of this has stirred tensions in the aftermath of the financial crisis: instability across the middle east after a stillborn arab spring; a three-year syrian civil war; a failed russia “reset”; rising conflict between china and japan; fraying american alliances with countries like brazil, germany, and saudi arabia.

and yet geopolitical concerns haven’t particularly changed our views on global markets. each conflict has been small and self-contained (or the spillover wasn’t perceived to matter much). geopolitics has been troubling on the margins but not worth more than a fret.

that’s about to change. though perceived as discrete events, the rise of these geopolitical tensions are all directly linked to the creative destruction of the old geopolitical order. it’s a process that’s gaining momentum, creating in turn larger-scale crises and broader market volatility. we’ve now reached the point where near- to mid-term outcomes of several geopolitical conflicts could become major drivers of the global economy. that’s true of russia/ukraine, iraq, the east and south china seas and us/europe. in each, the status quo is unsustainable (though for very different reasons). and so, as it were, the four horsemen of the geopolitical apocalypse.

russia/ukraine

the prospect of losing ukraine was the last straw for a russian government that has been steadily losing geopolitical influence since the collapse of the soviet union over two decades ago. moscow sees nato enlargement, expanded european economic integration, energy diversification and the energy revolution as direct security threats that need to be countered. ukraine is also an opportunity for the kremlin…for president putin to invigorate a flagging support base at home.

putin intends to raise the economic and military pressure on kiev until, at a minimum, southeast ukraine is effectively under russian control. the ukrainian government’s latest effort in response, a unilateral week-long cease fire in the southeast, was greeted with lukewarm rhetoric by putin and rejected by russian separatists in the region, who escalated their attacks against the ukrainian military. meanwhile, thousands of russian troops recently pulled back from the ukrainian border have now been redeployed there, bolstered by putin ordering 65,000 russian troops on combat alert in the region.

the choices for kiev are thankless. if they press further, violence intensifies and russian support expands, either routing the ukrainian military, or taking serious losses and requiring direct “formal” intervention of russian troops. if they back off, they lose the southeast, which is critical for their internal legitimacy from the ukrainian population at large. all the while the ukrainian economy teeters with much of their industrial base off line, compounded by russian disruptions on customs, trade, and gas supply.

the growing conflict will lead to further deterioration of russia’s relationship with the united states and europe: gas flow disruptions, expansion of defense spending and nato coordination with poland and the baltic states, turbulence around moldova and georgia given their european association agreements this week…and “level 3” sectoral sanctions against russia. that in turn means a serious economic downturn in russia itself…and knock-on economic implications for europe, which has far greater exposure to russia than the united states does.

for the last several years, the major market concern for europe was economic: the potential for collapse of the eurozone. that’s no longer a worry. the primary risk to europe is now clearly geopolitical, that expanded russia/ukraine conflict hurts europe, in worst case pushing the continent back into recession.

iraq

like so much of the world’s colonial legacy, many of the middle east’s borders only “worked” because of the combination of secular authoritarian rule and international military and economic support. that was certainly true of iraq–most recently under decades of control by the baath party, beginning in 1963. saddam hussein’s ouster forty years later by the united states and great britain, combined with the dismantling of nearly all of the military and political architecture that supported him (in dramatic contrast to, say, the ouster of egypt’s hosni mubarak) undermined iraq’s territorial integrity. since then, iraqi governance could still nominally function given significant american military presence and military and economic aid. once that was removed, there was little left to keep iraq functioning as a country.

sectarianism is the primary form of allegiance in iraq today, both limiting the reach of prime minister nouri al maliki’s majority shia government and creating closer ties between iraq’s sunni, shia and kurdish populations and their brethren outside iraq’s borders. extremism within iraq has also grown dramatically as a consequence, particularly among the now disenfranchised sunni population–made worse by their heavy losses in the war against bashar assad across the largely undefended border with syria. the tipping point came with the broad attacks by the islamic state of iraq and syria (isis) over the past fortnight, speeding up a decade-long expansion of sectarian violence and ethnic cleansing between iraq’s sunni and shia. the comparatively wealthy and politically stable kurds have done their best to steer clear of the troubles, seizing a long-sought opportunity for de facto independence.

the american response has been cautious. domestic support for military engagement in iraq diminished greatly as the war in iraq continued and the economic and human costs mounted. obama repeatedly promised an end to the occupation and considered full withdrawal a major achievement of his administration. there’s little domestic upside for taking responsibility in the crisis. obama’s position has accordingly been that any direct military involvement requires a change in governance from the iraqis–initially sounding like a unity government and increasingly evolving into the replacement of prime minister maliki. the pressure on maliki has gained momentum with shia grand ayatollah ali al-sistani calling on the iraqi prime minister to broaden the government to include more kurds and sunnis.

but maliki, having successfully fought constitutional crises and assassination attempts, to say nothing of decisively winning a democratic election, is unlikely to go. isis poses a threat to the unity of the iraqi state, but not to maliki’s rule of iraq’s majority shia population, which if anything now stands stronger than it did before the fighting. and maliki’s key international sponsor, iran, has little interest in forcing maliki into compromise as long as there’s no threat to baghdad: they see themselves in far better strategic standing with a maliki-led iraqi government where they exert overwhelming influence, than over a broader government where they’re one of many competing international forces. further, even if maliki were prepared to truly share power with iraq’s kurds and sunni (something made more likely by the informal “influence” of 300 us military advisors now arriving in baghdad), he’s unlikely to see much enthusiasm responding to that offer. the kurds are better off sticking to nominal (and a clearer road to eventual formal) independence; and sunni leaders that publicly find common cause with maliki would better hope all their family members aren’t anywhere isis can find them.

absent american (or anyone else’s) significant military engagement, the iraqi government is unlikely to be able to remove isis from leadership and, accordingly, reassert control over the sunni and kurdish areas of the country. that will lead to a significant increase in extremist violence emanating from the islamic world, a trend that’s already deteriorated significantly in recent years (and since obama administration officials announced that cyberattacks were the biggest national security threat to the united states–a claim president obama overturned during his west point speech last month). since 2010, the number of known jihadist fighters has more than doubled; attacks by al qaeda affiliates have tripled.

the combination of challenging economic conditions, sectarian leadership, and the communications revolution empowering individuals through narrowing political and ideological demographic lenses all make this much more likely to expand. that’s a greater threat to stability in the poorer middle eastern markets, but also will morph back into a growing terrorist threat against western assets in the region and more broadly. that creates, in turn, demand for increased security spending and bigger concerns about fat tail terrorism in the developed world, particularly in southern and western europe (where large numbers of unintegrated and unemployed islamic populations will pose more of a direct threat).

the broader risk is that sunni/shia conflict metastasizes into a single broader war. isis declares an islamic state across sunni iraq and syria, becoming ground zero for terrorist funding and recruitment from across the region. the saudi government condemns the absence of international engagement in either conflict and directly opposes an increasingly heavy and public iranian hand in iraqi and syrian rule. the united states completes a comprehensive nuclear deal with iran and declares victory (but doesn’t work meaningfully with teheran on iraq), steering clear of the growing divide between the middle east’s two major powers. the gulf cooperation council starts to fragment as members see opportunity in economic engagements with iran. iranian “advisors” in iraq morph into armed forces; saudi arabia publicly opposes isis, but saudi money and weapons get into their hands and an abundance of informal links pop up. militarization grows between an emboldened iran and a more isolated, defensive saudi arabia. that’s when the geopolitical premium around energy prices becomes serious.

east/south china sea

ukraine and iraq are the two major active geopolitical conflicts. but there are two more geopolitical points of tension involving major economies that are becoming significant.

in asia, it’s the consequences of (and reactions to) an increasingly powerful and assertive china. the growth of china’s influence remains the world’s most important geopolitical story by a long margin. but, at least to date, china’s growth is mostly an opportunity for the rest of the world. for the middle east, it’s the principal new source of energy demand as the united states becomes more energy independent. for africa, it’s the best opportunity to build out long-needed infrastructure across the continent. for europe and even the united states, it’s a critical source of credit propping up currency, and a core producer of inexpensive goods. that’s not to argue that there aren’t significant caveats in each of these stories (or that those caveats aren’t growing–they are), but rather that overall, china has been primarily perceived as an opportunity rather than a threat for all of these actors, and so it remains today.

for asia, a rising china has been seen more clearly as a double-edged sword. the greater comparative importance of the chinese economy has translated into more political influence (formal and informal) for beijing, at the expense of other governments in the region. meanwhile, china’s dramatic military buildup has fundamentally changed the balance of power in asia; it’s had negligible interest elsewhere.

china’s military assertiveness has also grown in its backyard. in other regions, china continues to promote itself as a poor country that needs to focus on its own development and stability. in east and southeast asia china has core interests that it defends, and it is increasingly willing to challenge the status quo as its influence becomes asymmetrically greater.

that’s been most clear with vietnam, where china first sent one oil rig to drill in contested waters directly off vietnam’s shore–accompanied by several hundred chinese fishing vessels. they announced last week that they are repositioning four more. unsurprisingly, the vietnamese response has been sharp–anti-chinese demonstrations, violence, increased naval presence in the region, and coordination with the philippines.

none of that creates significant political risk on its own: vietnam isn’t an ally of the united states and so engenders less support and response from washington than the philippines or japan…which is precisely why beijing has decided that’s the best place to start changing the regional security balance.

but tokyo feels differently. the japanese government understands that a rising china is longer term a much more existential threat to its own security position in asia, and it isn’t prepared to wait to raise concern until its position weakens further. so prime minister shinzo abe has declared his security support for vietnam. for america’s part, obama has jettisoned the official “pivot” to asia. but the administration continues to believe that america’s core national security interests, now and in the future, are in asia; and if china significantly escalates tensions in the east and south china seas, the united states is not likely to sit as idly by as they have on syria or ukraine.

the good news here is that–unlike with the countries driving the tensions in eurasia and the middle east–china has solid political stability and isn’t looking for international trouble. but the realities of chinese growth, coupled with strong leadership from japan and (over time) india, along with the persistence of a strong american footprint are contributing to a much more troublesome geopolitical environment in the region.

the principle danger to the markets is what happens if the chinese government no longer holds that perspective. president xi jinping’s commitment to transformational economic reform has been strong over the first year of his rule, and he has gotten surprisingly little pushback from the country’s entrenched elites. but the uncertainty around china’s near- to medium-term trajectory is radically greater than that of any of the world’s other major economies. should significant instability emerge in china, very plausible indeed, china’s willingness to take on a far more assertive (and risk-acceptant) security strategy in the region, promoting nationalism in the way putin has built his support base of late, would become far more likely. and then, the east and south china seas move to the top of our list.

us-europe

finally, the transatlantic relationship. advanced industrial economies with consolidated institutions and political stability, there’s none of the geopolitical conflict presently visible in the middle east, eurasia, or asia. geopolitical tensions have long been absent from the transatlantic relationship, the great success of the nato alliance. for all the occasional disagreement in europe on us military and security policy both during the cold war and since (the war in iraq, israel/palestine, counterterrorism and the like), european states never considered the need for broader security ties as a counterbalance for nato membership.

but the changing nature of geopolitics is creating a rift between the united states and europe. american global hegemony had security and economic components, and it was collective security that had been the core element holding together the transatlantic alliance. that’s no longer the case–a consequence of changing priorities for the americans and europeans, and an evolving world order (russia/ukraine a major blip, but notwithstanding). the transatlantic relationship is much less closely aligned on economics.

it’s not the conventional wisdom. most observers say that, after bush, american policy looks more european these days–less militarist, more multilateralist. but actually, us foreign policy isn’t becoming more like europe, it’s becoming more like china. it’s less focused on the military, except on issues of core security concern (in which case the united states acts with little need to consult allies), while american economic policy tends to be unilateralist in supporting preferred american geopolitical outcomes–which is seen most directly in us sanctions behavior (over $15bn in fines now levied against more than 20 international banks–mostly european) and nsa surveillance policy (with no willingness of the us to cooperate in a germany requested “no spying” mutual agreement)

transatlantic economic dissonance is also in evidence in a number of more fundamental ways: america’s “growth uber alles” approach to a downturn in the economy, compared to germany’s fixation on fiscal accountability. europe’s greater alignment between governments and corporations on industrial policy, as opposed to a more decentralized, private-sector led (and occasionally captured) american policy environment. a more economy-driven opportunistic european approach to china, russia and other developing markets; the us government looking focused more on us-led/”universalist” principles on industrial espionage, intellectual property, etc.

as the g-zero persists, we will see the united states looking to enforce more unilateral economic standards that the europeans resent and resist; while the europeans look to other countries more strategically as counterbalances to american economic hegemony (the german-china relationship is critical in this regard, but that’s also true of europe’s willingness to support american economic policies in russia and the middle east). all of this means a much less cooperative trans-atlantic relationship–less “universalism” (from the american perspective) and less “multilateralism” (from the european perspective). more zero-sumness in the transatlantic relationship is a big change in the geopolitical environment; a precursor to true multipolarity, but in the interim a more fragmented and much less efficient global marketplace.

* * *

so that’s where i see geopolitics emerging as a key factor for the global markets–much more than at any time since the end of the cold war. there’s some good news and bad news here.

the good news is none of these geopolitical risks are likely to have the sort of market implications that the macro economic risks did after the financial crisis. there are lots of reasons for that. a low interest rate environment and solid growth from the us and china–plus the eurozone out of recession–along with pent up demand for investment is leading to significant optimism that won’t be easily cowed by geopolitics. the supply/demand energy story is largely bearish, so near-term geopolitical risks from the middle east won’t create sustained high prices. and markets don’t know how to price geopolitical risk well; they’re not covered as clearly analytically, so investors don’t pay as much attention (until/unless they have to).
 
the bad news…that very lack of pressure from the markets means political leaders won’t feel as much need to address these crises even as they expand, particularly in the united states. this is another reason the world’s geopolitical crises will persist beyond a level that a similar economic crisis would hit before serious measures start to be taken to mitigate them. these geopolitical factors are going to grow. now’s the time to start paying attention to them.

* * *

every once in a while, it’s good to take a step back and look at the big picture. hope you found that worthwhile. i’ll surely get back in the weeds next monday.

meanwhile, it’s looking like a decidedly lovely week in new york.

very best,
ian

From intel sources:

Dislodging ISIS Will Be a Difficult Task

The ISIS advance toward Baghdad may be temporarily held off as the government rallies its remaining security forces and Shia militias organize for the upcoming Battle for Baghdad. There is a rather clear reason why the ISIS leader has renamed himself Abu Bakr al-Baghdadi, meaning the Caliph of Baghdad . ISIS will at a minimum be able to take control of some Sunni neighborhoods in Baghdad shortly and wreak havoc on the city with IEDs, ambushes, single suicide attacks, and suicide assaults that target civilians, the government, security forces, senior members of government, and foreign installations and embassies. Additionally, the brutal sectarian slaughter of Sunni and Shia alike that punctuated the violence in Baghdad from 2005 to 2007 is likely to return as Shia militias and ISIS fighters begin to assert control of neighborhoods and roam the streets.

Even if Iraqi forces are able to keep ISIS from fully taking Baghdad and areas south, it is unlikely the beleaguered military and police forces will be able to retake the areas under ISIS control in the north and west without significant external support, as well as the support of the Kurds.

ISIS and its allies are in a position today that closely resembles the position prior to the US surge back in early 2007. More than 130,000 US troops, partnered with the Sunni Awakening formations and Iraqi security forces numbering in the hundreds of thousands, were required to clear Anbar, Salahaddin, Diyala, Ninewa, Baghdad, and the “triangle of death.” The concurrent operations took more than a year, and were supported by the US Air Force, US Army aviation brigades, and US special operations raids that targeted the jihadists’ command and control, training camps, and bases, as well as its IED and suicide bomb factories.

Today, the Iraqis have no US forces on the ground to support them, US air power is absent, the Awakening is scattered and disjointed, and the Iraqi military has been humiliated badly while surrendering or retreating in disarray during the lightning fast jihadists’ campaign from Mosul to the outskirts of Baghdad. This campaign, by the way, has been remarkably and significantly faster than the U.S. armored campaign advance to Baghdad in 2003 . The US government has indicated that it will not deploy US soldiers in Iraq, either on the ground or at airbases to conduct air operations.  Meanwhile, significant amounts of US made advanced armaments, vehicles, ammunition, and diverse military equipment have fallen into ISIS jihadists’ hands .

ISIS is advancing boldly in the looming security vacuum left by the collapse of the Iraqi security forces and the West’s refusal to recommit forces to stabilize Iraq. This has rendered the country vulnerable to further incursions by al Qaeda-linked jihadists as well as intervention by interested neighbors such as Iran. Overt Iranian intervention in Iraq would likely lead any Sunnis still loyal to the government to side with ISIS and its allies, and would ensure that Iraq would slide even closer to a full-blown civil war and de facto partition, and risk a wider war throughout the Middle East.

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Important Disclosures

Read more: http://www.businessinsider.com/four-horsemen-of-the-geopolitcal-apocalypse-2014-6#ixzz35rBBO1Ez

Stocks Fluctuate Following Recent Advance – Topping Consolidation Or Just A Flat Correction?

Briefly: In our opinion, no speculative positions are justified.

Our intraday outlook remains neutral, and our short-term outlook is now neutral, following Tuesday’s intraday reversal:

Intraday (next 24 hours) outlook: neutral
Short-term (next 1-2 weeks) outlook: neutral
Medium-term (next 1-3 months) outlook: neutral
Long-term outlook (next year): bullish

The U.S. stock market indexes gained between 0.3% and 0.7% on Wednesday, retracing Tuesday’s move down, as investors were buying stocks despite worse-than-expected GDP data release. So, ouryesterday’s short-term neutral outlook has proved to be quite accurate. The S&P 500 index continues to fluctuate slightly below its recent all-time high of 1,968.17. The resistance level is at 1,960-1,970, and the nearest level of support is at 1,940-1,950. For now, it looks like a flat correction within an uptrend. There have been no confirmed sell signals so far. The market remains above its month-long upward trend line, as we can see on the daily chart:

Click image for larger chart:

Expectations before the opening of today’s session are virtually flat and the main European stock market indexes have been mixed so far. Investors will now wait for some economic data announcements: Initial Claims, Personal Income, Personal Spending, PCE Prices – Core at 8:30 a.m. The S&P 500 futures contract (CFD) extends its short-term consolidation below the level of resistance at around 1,960. For now, it looks like a flat correction within long-term uptrend. The nearest support level is at 1,935-1,940, marked by previous local low, as the 15-minute chart shows:

The technology Nasdaq 100 futures contract (CFD) is in a relatively narrow intraday trading range, as it is relatively stronger than the broad market. The resistance level is at 3,825-3,830, and the nearest important support level is at 3,790-3,800:

Concluding, the broad stock market appears to be in a short-term consolidation, fluctuating along the level of 1,950. We decided to close our speculative long position, expecting some more consolidation or a downward correction.

Thank you.

….also from Sunshine Profits:

JUNE 26 GOLD & SILVER TRADING ALERT

As an investor and a speculator I am mostly interested in Cyclical Markets (Cyclical Bull or Bear Markets). On average Cyclical Bull Markets last between 4 and 5 years and Cyclical Bear Markets last between 2 and 3 years. Cyclical Markets occur within Secular Markets that define the long term trend. Over the last 100 years, history has shown that the Dow Jones Secular Markets last about 17-18 years on average. For example the Secular Bull Market from 1945 to 1963 lasted 18 years and made over 350% gains, the Secular Bull Market from 1982 to 2000 lasted also 18 years and made over 1 000% gains.

The last Secular Bear Market began in March 2000. If it did not already end in March 2009, then 2013 should be the 14th year of this Secular Bear Market. On the other hand, if the Secular Bear Market ended in March 2009, then a new Secular Bull Market began in March 2009 and we are currently in the 5th year of this Secular Bull Market. In that case 9 years were enough for the Secular Bear Market to correct the previous Secular Bull Market of 18 years (1982-2000) – it is a 50% time ratio. The Dow Jones made new highs and is currently about 20% above the high on October 11, 2007 which is the reason why I favor the second possibility and I think that a new Secular Bull Market has begun in March 2009. The market is in a strong impulsive move since March 2009 bottom and I expect the market to continue to climb a “wall of worry” during several years.

On the following chart you can see the Secular and Cyclical Bull and Bear Markets: (Click Chart for larger view)

The history of the market shows that the Dow Jones Bull Market often topped between Weeks 261 – 268. Currently at Week 275 from March 2009 low, we should be very close to an intermediate top.

Here is the period duration of Cyclical Bull Markets:

1937 low – 1942 top lasted 268 weeks
1982 low – 1987 top lasted 263 weeks
1994 low – 2000 top lasted 268 weeks
2002 low – 2007 top lasted 261 weeks
2009 low – 2014 top lasted 275 weeks (Jun 24 high)

The Primary Bull Market from major low on December 9, 1974 to major top on Jan 14, 2000 lasted 1305 weeks and had a crash in October 1987, right in the middle of this Bull Market. The Bull Market from October 20, 1987 low to Jan 14, 2000 top lasted 626 weeks which is almost half duration of the Primary Bull Market. History could repeat itself as the Bull Market from Oct 10, 2002 low to Oct 11, 2007 top lasted 261 weeks and the Bull Market from 2009 low until now lasted 275 weeks, having a crash in 2008, right between these Bull Markets. Market likes symmetry both in price and time.

The same thing happened for the Bear Markets. For example, the Bear Market from Jan 14, 2000 top to October 10, 2002 low lasted 143 weeks and the Bear Market from Oct 11, 2007 top to March 6, 2009 low lasted 73 weeks which is 50% of time duration of the previous Bear Market (143/2). History has shown that the Bear Market from Sept 3, 1929 high to July 8, 1932 low lasted 148 weeks which is very close to the duration of the 2000-2002 Bear Market (143 weeks).  The Bear Market from Sept 22, 1976 to Mar 1, 1978 lasted 75 weeks which is also very close to the Bear Market from 2007 to 2009 (73 weeks).

The previous examples are showing us that history repeats itself and I am more and more inclined to think that March 6, 2009 low was the beginning of a new Secular Bull Market and that the Bear Market from 2000 high to 2009 low has ended. This Bear Market lasted 9 years (465 weeks for SPX) and looks very similar to the previous Bear Market from Jan 19, 1966 high to Dec 9, 1974 low that also lasted almost 9 years (461 weeks). It is important to keep in mind that the Stock Market movements always anticipate the general economy whether it is a recession or a recovery. That is why the Stock Market is usually not related to the economic news when a major bottom or a major top occurs.

While the majority is looking at the Megaphone Pattern correction since 2000 high and is expecting the market to go back to the lower trendline of this pattern and to make new lows, I think that it will not happen. The opinion of the majority can be used as a contrarian indicator. I think that a healthy correction in this new Secular Bull Market could push the Dow Jones to 12500-13500 (end of 2015 – half 2016) followed by a second leg up of this new Secular Bull Market.

The corrections from low to low during the previous Secular Bull Market and the last Secular Bear Market from 2000 to 2009 lasted between 334 and 444 weeks with an average of 382 weeks.

Here is the time duration of periods between the major lows:

 1974 low – 1982 low lasted 400 weeks
1980 low – 1987 low lasted 395 weeks
1987 low – 1994 low lasted 337 weeks
1994 low – 2002 low lasted 444 weeks
2002 low – 2009 low lasted 334 weeks

A major low coming at the end of 2015 or early in 2016 would fit with this 334-444 weeks range.

A top in 2014 and a low in 2016 would also match with an uptrend period of 5 years, with the period of  7 years for a top and also with the period of 7 years for a low: (Click Chart for larger view)

According to the Elliott Wave Theory impulsive moves are made of 5 waves and I think that the market is very close to finish an extended Wave 3 and to plunge into a corrective Wave 4. As Wave 3 is extended there is a possibility that Wave 5 will be truncated. After Wave 5 I expect the market to plunge into a major low in 2016 to keep pace with its previous lows every 7 years and then to enter a new impulsive leg up for at least 5 years.

(Click Chart for larger view)

The Dow Jones and the New York Stock Exchange made recently new highs while the Nasdaq, the Russell and the Banks Index did not. Large caps and blue chips are usually the last to be sold before an intermediate correction. This divergence reinforces my view that the market is heading into a corrective Wave 4. Below are the charts of the Nasdaq, the Russell and the Banks Index representing these divergences. You can also notice that these indexes broke below their intermediate channels and backtested them. The Russell and the Banks Index are also forming possible Head and Shoulders Patterns.

Forecasting the market accurately is impossible but studying the market history makes me believe that a new Secular Bull Market has begun in 2009. I think that the money flow will continue going into the Commodities sector until the market bottoms in 2016 but once it will, investors should be back in the Stock Market. The next major low in 2016 could be a once in a generation buy opportunity in the US Market.

Trader MC

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The Federal Reserve meeting: The market may have been expecting the Fed to “hint” at some very modest “tightening” of policy…but that didn’t happen…the Fed remained as “dovish” as ever…it seems that the Fed is “more than willing” to tolerate inflation running well above their 2% target for several months before they will start “tightening.” Therefore:

Stocks: after a very brief 2% decline on “geo-political concerns” the DJIA and the S+P have resumed their uptrend…registering new All Time Highs…long live the Fed!  

US Dollar: fell modestly against most currencies.

Bonds: May start to “worry” more about inflation.

Canadian Dollar: jumped to 5 month highs on anticipation that stronger CPI and retail sales may stop Poloz from “talking the dollar down.

Gold: jumped over $40…breaching resistance levels…it appears poised to move higher.

Option Volatility: for most asset classes remained near historical lows…with stock market option vol moving to new multi-year lows.

Crude oil: Consolidated last week’s sharp gains and moved modestly higher.

What are we trading? The Driving Force behind current Market Psychology remains the anticipation of Central Bank policy/action…last week the market had “hints” from the UK and New Zealand CBs that interest rates would be rising…and their currencies rallied…this week the “dovish” tone from the Fed gave the stock market a green light to rally to new highs…while the USD fell…while “hints” from the Norwegian Central Bank that interest rate hikes would be delayed caused the Krone to tumble.

It’s a Central Bank Market: The absolutely massive “money printing” from the world’s CBs has clearly caused asset inflation in stock and bond markets…and now we have reports that CBs around the world have been directly buying equities as well as bonds!..that huge Chinese buying of European equities probably caused the Euro to be much higher than it would otherwise have been!

DEFLATION/INFLATION: Last week we wrote the following paragraph…and we want to repeat it again this week: For years we have steadfastly embraced the Gary Shilling “Age of Deflation” view…and that seems to have been correct…but…we are beginning to change our mind on that score. This past week saw Central Banks in New Zealand and Britain caution that interest rates will be rising. Current Market Psychology seems to expect that interest rates will be kept low for a long time and that any increases will be very timid. If Market Psychology changes, and begins to anticipate a shift to a more inflationary environment with higher interest rates,  we could see big moves in the market.        

Trading this past week: We started the week short gold but…the rally in gold the previous week had put gold price action on our “radar screen” and we covered our short positions mid-week as gold began to rally through resistance levels. We continue to hold our long US Dollar Index positions and…we are hanging onto our cheap out-of-the-money S+P puts…the trade was a “punt” and we are losing money…the puts have lost ~50% of their value and if the stock market doesn’t roll over next week we will liquidate. We have NOT moved to sell short the COMDOLS as we thought we might…we had thought that Market Psychology was underestimating how quickly the Fed might move to “tightening”…but it seems we were wrong about that…our trading is out-of-sync with the market…we need to “clear our minds” and get back in sync!

Recently I’ve turned more bullish on prostitutes and illegal drug sales. 

This is not some newfound libertarian streak. I’m really just thinking about what’s best for the eurozone. 

This takes a bit of explaining…

Last week Italy announced that beginning next year it will include revenues from drug trafficking and the sex trade, in addition to contraband tobacco and alcohol, in calculating GDP. 

You’re probably hoping that someone will pinch you, but in the Maastricht Treaty that established the euro in 1992, member states were asked to meet strict criteria, including a budget deficit of less than 3% of GDP.

Unfortunately, Italy – whose economy is contracting rather than expanding – cannot meet that criterion, unless it includes black market activities. Will that really be enough to make a difference?

Surprisingly, the answer is maybe. Last month Britain said including revenue from drugs and prostitution into European Union accounts would total $16.8 billion a year, equivalent to 1% of output. 

In Italy, it seems, gross criminal conduct may become an essential part of gross national product. (I can just see a few economists from the Chicago school shouting “at last!”)

This Isn’t Working

The real eye-opener here is just how far the European Union and its central bank are willing to go to try to patch up an inherently unworkable currency.

Bear in mind, the euro is still very much an experiment. That surprises some investors since the euro is the world’s second-largest reserve currency and the second-most traded currency after the U.S. dollar. With approximately $1 trillion worth in circulation, the euro also has the highest combined value of banknotes and coins in circulation. And, considered as a whole, the eurozone is the world’s second-largest economy.

But the problem is that the currency must serve different countries with different governments, different political and economic needs, and different strengths and weaknesses.

At Cross Purposes

In Germany and the Netherlands right now, for instance, economic growth is increasing. (Not enough but at least the figure is a positive one.) However, Greece and Spain have seen their economies contract for six years now. Unemployment in both countries is at 25%. 

The Greeks and Spaniards would love to see a weaker currency to boost exports and attract international tourists to their seaside resorts. But that can’t happen because they have outsourced their monetary policy to Frankfurt. 

And much of their fiscal policy, too. Another plank of the Maastricht Treaty is that fiscal deficits must be less than 60% of GDP. This was widely flouted after the euro’s introduction but stronger European nations still pay lip service to the idea and encourage “austerity” for profligate member states Portugal, Italy, Ireland, Greece and Spain (the PIIGS).

Unclear Path Forward

How will all this play out? Your guess is as good as mine. After all, the geniuses that dreamed up this common currency didn’t even create an exit. There is no pathway or precedent for dropping out. And it would be a nightmare for any countries that did – since their new currencies would plunge and their borrowing costs would soar – as well as those of the countries holding their sovereign debt. 

And so I suppose we will see the Italians keeping closer tabs on their streetwalkers and meth dealers. (You really couldn’t make this stuff up.) 

In addition, eurozone depositors will start receiving negative interest on their bank balances. That’s right. They’re going to have to pay to keep their money in cash.

You might ask why the European Central Bank doesn’t take a page from the Federal Reserve’s book and stimulate the euro economies by buying up euro-denominated government debt to lower longer-term rates. 

But the yield on the 10-year Spanish Treasury is already lower than the yield on 10-year U.S. Treasury bonds.

That looks like a bad bet. So it’s hookers and heroin for now. 

Good investing,

Alex

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